## Global Banks May Grow More Vulnerable to a Dollar Disruption

_IMF Blog, October 11, 2019_

## Source details

**Canonical URL:** [Global Banks May Grow More Vulnerable to a Dollar Disruption](https://www.imf.org/en/blogs/articles/2019/10/11/blog-global-banks-may-grow-more-vulnerable-to-a-dollar-disruption)

## Other formats

- [Markdown version](/en/blogs/articles/2019/10/11/blog-global-banks-may-grow-more-vulnerable-to-a-dollar-disruption/index.md)
- [Structured JSON version](/en/blogs/articles/2019/10/11/blog-global-banks-may-grow-more-vulnerable-to-a-dollar-disruption/index.json)
- [Bundle manifest](/en/blogs/articles/2019/10/11/blog-global-banks-may-grow-more-vulnerable-to-a-dollar-disruption/bundle-manifest.json)

## Bibliographic details
- Authors: Claudio Raddatz, Adolfo Barajas
- Published: October 11, 2019

---

### Role of the US dollar in non-US banking
- Non-US banks play a key role in dollar lending worldwide, financing transactions such as a Mexican airline buying Brazilian airplanes with US dollar loans obtained from non-US banks.
- Non-US banks’ dollar assets rose to $12.4 trillion by mid-2018 from $9.7 trillion in 2012.
- Non-US banks’ dollar assets remain comparable to pre-crisis levels relative to their total assets.

### Sources of dollar funding and structural vulnerabilities
- Unlike US banks, non-US banks have limited access to a stable base of dollar deposits and therefore rely heavily on short-term and potentially more volatile funding sources, such as commercial paper and loans from other banks.
- When short-term funding is insufficient, non-US banks turn to foreign currency swaps, which are more expensive and can be unreliable in times of stress.
- An increase in dollar funding costs can reverberate across the global financial system and boost the odds of bank defaults in home economies of non-US banks.

### Indicators developed to measure exposure and vulnerability
- Cross-currency funding gap:
  - Has widened to about $1.4 trillion, or 13 percent of assets, from $1 trillion, or 10 percent of assets, in mid-2008.
  - Reflects the amount of financing that must be filled by instruments like foreign currency swaps, increasing vulnerability.
- Highly liquid dollar assets measure:
  - Shows that dollar liquidity has improved since the crisis but remains lower than the overall liquidity of banks’ balance sheets.
- US dollar stable funding ratio:
  - Reflects banks’ ability to fund dollar assets over a long time horizon using stable sources.
  - Has improved only moderately since 2008.

### Transmission channels and differential impacts
- Higher dollar funding costs:
  - Increase the odds of bank defaults in home economies of non-US banks that rely on dollar funding.
  - Increase stress in third countries that receive loans from non-US banks.
- Emerging-market borrowers are most vulnerable because they cannot easily find alternative sources of funding.
- US dollar funding fragility can act as an amplifier: negative effects are especially pronounced when any of the chapter’s measures indicates heightened vulnerability.

### Policy mitigators and recommendations
- Strengthen overall health of the banking system:
  - More profitable, better capitalized banks provide a cushion against dollar disruptions.
- Build larger reserve holdings:
  - Central bank reserves can be used to fill dollar liquidity gaps if they dry up.
- Maintain or arrange central bank swap lines:
  - Central bank swap arrangements that provide access to US dollars during periods of stress can play an important role, as they did during the 2007-2008 crisis.
- Improve measurement and monitoring:
  - Use the developed set of indicators to properly measure non-US banks’ exposure to dollar funding and their vulnerability.

*Source: IMF blog post "Global Banks May Grow More Vulnerable to a Dollar Disruption" (October 11, 2019).*

---


## References

- [Global Financial Stability Report](https://www.imf.org/en/Publications/GFSR/Issues/2019/10/01/global-financial-stability-report-october-2019)
- [https://www.imf.org/wp-content/uploads/2019/10/eng-september-25-gfsr-ch5-2-1-1.png](https://www.imf.org/wp-content/uploads/2019/10/eng-september-25-gfsr-ch5-2-1-1.png)
- [https://www.imf.org/wp-content/uploads/2019/10/eng-september-25-gfsrch5-3.png](https://www.imf.org/wp-content/uploads/2019/10/eng-september-25-gfsrch5-3.png)

_Source: https://www.imf.org/en/blogs/articles/2019/10/11/blog-global-banks-may-grow-more-vulnerable-to-a-dollar-disruption_